Return on investment of over 300%: this is one of the most profitable sectors of international finance that Europe could face on 3 September. The European Commission, alerted by a report by MEP Axel Voss published in mid-2022, will close on Tuesday an audit concerning litigation funds, one of the most profitable and controversial investments.
The way it works is simple and takes place in the courts: funds are provided to financially support plaintiffs during a trial, particularly against large companies. By allowing them to hire lawyers and prepare a quality defence over several years, they pay fees that can range from 20 to 50% of the money recovered by victims, in the event of victory.
There is no shortage of examples of such proceedings: one of the main French players in the sector, Deminor, for example, supported 2,500 plaintiffs during the Madoff case; the American Gramercy has just paid $550 million to support 700,000 plaintiffs fighting against the mining companies BHP and Vale; TikTok, the target of class-action complaints over data breaches, has seen financiers flock to bring the procedure to a close since 2020.
Possible bankruptcy, debate over revenue
The litigation fund industry is not very developed. The main French player in the sector, IVO Capital Partners, reports only 47 transactions carried out in 10 years, for an amount of 115 million euros deployed by the end of 2023. On a global scale, between 40 and 80 billion euros would be allocated to the sector. victims.
Australia, the Netherlands and the United States are the largest providers; but in Europe, Paris has extensive expertise in international judicial arbitration and could see these funds develop. This entails, like any unregulated financial investment, significant risks: the American player LexShares has resigned from one of its funds and laid off its staff after the pandemic caused delays in judicial decisions.
Litigation funds do not win all their cases, far from it, and can suffer huge losses. Their profitability is also the subject of debate: to our colleagues at Les Echos, the director of IVO, Charles Demoulin, states that 20% of cases are lost and that the firm aims for a profitability of 12% per year, once insurance is included.
Figures that contrast with the report by Axel Voss, which cites a profitability of up to 300% to 3,000%, spread over the course of the procedure. IVO estimates that without insurance, its profitability is 20% to 25% net.
Burford Capital, one of the world’s leading funds, refutes Voss’s accusations by publishing its figures: it speaks of a net return on investment of 11% per year. But it also highlights that of the 173 cases in which it intervened between 2009 and 2022, it generated a return of more than 200% on 22 occasions – with an average return of 69%.
States are concerned about interference and test bosses
Europe could decide to regulate the sector more effectively by imposing a maximum rate on the fees charged to whistleblowers. The European Parliament has already approved many of the measures proposed by Axel Voss.
The ethical argument (imposing costs on the victim so that he can defend himself and generate profits from his victory) is at the heart of the European position. Germany has already limited commissions to 10% and the United Kingdom has banned percentage remuneration, a rule that was very quickly circumvented.
The US authorities, for their part, have expressed concern about possible Russian interference in this area: the Kremlin could take advantage of the opacity of the current rules to interfere in trials and destabilise large companies. The industry responds that, on the contrary, the American Chamber of Commerce, in particular, calls for greater supervision to defend the interests of these large multinationals.
The debate on 3 September will therefore be a thorny one, but it should not cast doubt on litigation funds, whose prospects seem particularly bright thanks to the multiplication of lawsuits in the environmental field.
Source: BFM TV
